Investing In Bitcoin

This was originally published on the Let’s Talk Bitcoin blog.

One topic I am often asked about by clients is investing in Bitcoin. Not just bitcoins the currency, but Bitcoin, the network and technology ecosystem. The conversation usually starts like, “I have X amount of money to invest in Bitcoin, how should I invest it?” After giving the disclaimer that I am not a licensed financial advisor and this is strictly my personal opinion, this is what I tell them:

Diversify your assets.

It is tried and true investment advice, and this is no different in the Bitcoin ecosystem. Putting all your eggs in one basket can be risky, for if something goes wrong with that basket, you stand to lose everything you’ve worked so hard for. While each investor’s risk tolerance is different, this advice is practical and proven for investors of all types of risk tolerance, from the conservative to the daredevil. If you have an investment portfolio which constitutes 100% of your personal investment income, I would consider a conservative investment in Bitcoin (or cryptocurrency more broadly) as being between 1-5% of this portfolio, a moderate risk tolerance being between 5-10%, and more aggressive being 10%+.

What I recommend to my clients is, first, after doing basic research into the fundamentals of the Bitcoin technology, invest in the bitcoin currency itself. Buy a small amount of bitcoins locally or from an exchange, spend some at a merchant you trust, send some to friends and family, practice storing some securely offline and bringing it back online, really get a feel for what you’re investing in so you can understand for yourself why this technology is gaining popularity and confidence in smart circles. If you come away believing in the long term viability of cryptocurrency as a technology and an asset class, put between a third and half of what you were planning on investing in Bitcoin into the currency itself.

After gaining some experience using the technology, explore the startup ecosystem. In the past few years, many innovative companies* have sprung up to serve the burgeoning cryptocurrency markets. There may even be one based near you, giving you an opportunity to meet the founding team and understand what motivates them to take what seems like a big risk on a new technology. After getting to know the space, begin your due diligence on the most promising companies. You can choose your investments based on your own criteria, whether its a service you personally want to exist, a service you see the market clamoring for, or something truly innovative that you can imagine being used for many purposes in the future. You might even just like the founders, and want to support them for personal and financial reasons. Maybe you even have a startup idea of your own that you want to invest time and money into. Whatever your criteria, another third to half of your allocated investment capital should be put into Bitcoin startups. That way, even if the price of bitcoin drops or Bitcoin itself fails, the company is still likely to survive, either because their business model isn’t wholly dependent on the price of Bitcoin or because they can adapt and adopt the next best cryptocurrency technology. Just keep in mind that startup investments are illiquid, long-term, and very risky commitments, and therefore aren’t appropriate for everyone.

This leaves some investment capital left over. When I ask my clients what they would invest the remainder in, the first choice is usually Bitcoin mining hardware. It seems like a sure bet; after all, it’s practically like owning a money-printing press, right? Well, not quite. When the Bitcoin network was first started, mining was very easy. Any computer with a CPU chip could do it, and early miners earned most of the coins that have ever been produced. As the bitcoin currency gained a monetary exchange value, there was more of an incentive to mine and innovate, which led to GPU mining and, more recently, ASIC mining. While GPUs are more commonplace (they power the graphics that computers produce on your screen), ASICs are not – this acronym stands for “application specific integrated circuit,” which is a technical way of saying that these chips are designed for one purpose and one purpose only: efficiently performing the computations necessary for Bitcoin mining (they can also be used for mining altcoins that use the same SHA-256 hashing algorithm). While mining has become more specialized, it’s also become increasingly competitive.

Whether or not mining is profitable can depend on a variety of factors, including the cost and reliability of the mining equipment, the accuracy of the manufacturer’s production schedule, the price of bitcoins, the mining difficulty, the cost of electricity where the equipment will be located while it is mining, and the time it takes for you to maintain these systems. If you have a reliable source of mining equipment and cheap electricity, it could be worth the investment. If not, you’re probably better off investing elsewhere. Some companies enable customers to offload a lot of these concerns to hosted mining operations that manage the equipment and maintenance costs (for a fee of course). The services of these companies often cost many times more than the cost of buying the hardware itself, making an already uncertain investment even more uncertain. I’ve had clients who profited from an innovative business model which allows you to trade mining capacity in real time similar to any other commodity exchange, but this is not quite the same as profiting from the mining itself and was likely due to sheer luck more than anything else. The short answer for mining: caveat emptor.

A final category that I would be remiss for leaving out is alternative cryptocurrencies, better known as “altcoins.” I’ve mentioned them a few times already, but they’re worth going into a bit more detail here. Altcoins are cryptocurrencies that people have created for fun, profit, or experimental/ academic reasons (often these motivations overlap). Many are “forks” or modified copies of the Bitcoin code, with several core parameters changed, such as the amount of coins that will ever be produced, the production schedule, difficulty retargeting, and/or the proof-of-work function. Others are more innovative, coding their own system from scratch, creating decentralized autonomous organizations, or even building application protocol layers directly on top of Bitcoin itself. Whatever the differences, these altcoins have been gaining increasing amounts of attention as people learn about Bitcoin and then discover that there’s a whole other ecosystem of over 100 altcoins. It’s worth investing at least 5-10% of what you’re allocating to cryptocurrencies in your investment portfolio into altcoins directly. No particular coin, use your best judgement with an altcoin as you would for any investment. Look at the community, the development team, traction in the market, features etc. Or maybe have a broad strategy where you put a little bit into everything, some a little more than others. Either way, many investors have made incredible gains in the altcoin market so it’s worth exploring.

As with all investments, cryptocurrency investing is risky. Because this sector is so new, it can be even riskier than others. Disruption can occur at a moments notice, and technological advancements mean things are constantly changing, at a seemingly faster pace than ever. But with great risk comes great potential reward, so if you’re excited about change, ready to shake up the status quo, and looking to capitalize on innovative new technology, cryptocurrency just might be the right investment for you.

Shameless plug, this is my Bitcoin startup. Learn more about us in this episode of Let’s Talk Bitcoin.

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Delving Deeper into Bitcoin with Bitcoin Consultant John Light and Buyers Best Friend’s Adam Sah

Originally posted on PokerListings.com

Cypto-currency Bitcoin remains an intriguing option for online poker players.

We investigated the subject earlier this year in a Bitcoin feature we did on SealsWithClubs founder Brian Micon.

We’re going one step farther today with a special Q&A by Nadia Hanna with Bitcoin experts John Light and Adam Sah.

John Light is an entrepreneur with a professional background in business operations and online marketing. He discovered Bitcoin when researching alternative currencies and eventually decided to move to Silicon Valley to start a Bitcoin consulting business where individuals and companies can learn about the digital currency.

Adam Sah opened an artisan food store, Buyers Best Friend, in 2012 and experienced the pain of handling cash, processing credit cards, costs and fees. They company designed their own Point of Sale (POS) system for processing bitcoins.

1. PokerListings: Why do you think the Government want to regulate Bitcoin? And who do you think is behind the drive to over-regulate it?

Adam Sah: It’s not true that the government wants to regulate “everything”– but in practice, the minute there are disputes or risks to large numbers of people, they have to step in.

In fact, I don’t see much evidence that anybody is materially trying to “overregulate” Bitcoin, and I’ve been pleasantly surprised at the sophisticated approach of the Obama administration, where they’re saying that regulation will come, without committing to the details.

Meanwhile, they took the obvious steps are restricting anonymity, which removes the egregious uses of Bitcoin for illegal purposes such as money laundering.

John Light: Less than a year ago, people didn’t think bitcoins were money anymore than arcade tokens or Linden Dollars, but now a serious discussion is being had. It’s incredibly positive in terms of measuring Bitcoin’s impact on the way people think about money and currency.

2. PL: What do you think is the future of BitCoin and can it bring increased financial freedom?

John Light: I think either Bitcoin or something like it – another cryptocurrency – will become very common, if not dominant, in the currency market.

People are realizing the benefits of this technology more every day, whether it’s the ability to transact with almost the same level of privacy as cash over the internet, or the ability to prevent wealth from being taken by privileged and powerful people, as is occurring all over the world.

Wealth confiscation en masse is very difficult, if not impossible, with Bitcoin. So yes, I think Bitcoin and other cryptocurrencies can bring increased financial freedom when implemented and used properly.

Adam Sah: More merchants need to accept it, which means easier processing and integrations with commercial POS and accounting systems. Bitcoin needs to find its way into mainstream use– everyday people have little reason to carry it.

BtC brings freedom to the extent that any new currency or capability brings freedom– you’re travelling internationally and currency exchange is a pain, now you can use Bitcoin.

3. PL: Will an international currency like BitCoin reduce the power of other significant currencies like the USD /GBP/EURO?

Adam Sah: By definition, yes. But the major reserve currencies already face “competition” from other reserve currencies and I doubt BitCoin will materially affect that.

John Light: Bitcoin has the potential to do so, especially if the organizations who control these currencies continue to devalue them with endless inflation, which benefits first recipients of new money in the short-term and punishes savers in the long-term.

4. What advice would you give to Bitcoin users in this regard?

John Light: Learn how to use encrypted offline cold storage solutions to keep your coins safe from theft, and try to always buy twice as many bitcoins as you plan to save or spend so that you can save half and spend the other half.

This keeps the economy liquid while also allowing you to build up your savings.

Bitcoin has gone from being completely worthless 4 years ago to over $100 per coin today; we’re still right at the beginning of a steep adoption curve of Bitcoin or Bitcoin-like technology, which will only continue to push the value higher (the law of supply and demand dictates this).

That said, long-term, Bitcoin is still a speculative investment, but if you believe in the potential for good that this technology has then it’s a bet worth making if you have some spare change to invest.

Adam Sah: I don’t have advice per se– we keep a limited amount of BtC on hand and don’t speculate on its value, instead focusing on our core business, which is bringing artisan food to the masses.

5. PL: Bitcoin is becoming an important option in the online poker world for players concerned about Gov. oversight/seizures/regulation – have you ever tried playing online poker, do you see it as a viable solution?

John Light: I have never played online poker myself, but know several people who make a living playing poker online. They’ve had to move out of the U.S. in order to continue making their living due to the laws here.

Bitcoin would be a great solution for the online/ mobile gaming industry for several reasons:

1) Bitcoin transactions are irreversible. Site operators do not have to worry about chargeback fraud.

2) Bitcoin offers instant gratification. When a customer wants to withdraw their funds, it takes a matter of minutes to receive the bitcoins, not hours or days as with bank transfers.

3) Bitcoin has built-in privacy for customers. People can gamble without having to expose their personal or financial information as is the case when using other payment methods.

4) Bitcoin has extremely low transfer fees. The standard network fee is .0005 bitcoins, which is a little over 5 cents USD right now. This fee is only paid by the sender of coins, not the receiver.